Banking on Small Economies of Scale

How the personal touch helps one-branch community banks thrive in an era of mega-mergers.

At the Roxbury Highland Bank of Jamaica Plain - a brick building with a chimney and flowers out front - the sole ATM isn't a big draw.

Tellers greet most customers by name. In fact, employees go to depositors' weddings, graduations, and birthdays. "We just don't want to miss them," says Jannette Ferstler, a teller who's watched several of her customers walk down the aisle.

Roxbury Highland is a Boston-area bank with a mere $23 million in assets and a total of nine employees. (By comparison, 170,860 will work for the newly combined Nationsbank and BankAmerica.)

But what's perhaps surprising in an era of mega-mergers is that small banks like Roxbury Highland aren't an endangered species. Their best asset is the friendly, personal touch many customers relish.

While big banks are merging to create economies of scale, cutting costs by doing everything in bulk, many community banks are also succeeding because of the economy of their scale.

"There's never been a better time for community banks," says Charles Meiburg, a professor at the Darden School of Business at the University of Virginia in Charlottesville.

In fact, 200 of these small banks were chartered last year, up from 157 in 1996 and 111 in 1995, according to the American Bankers Association in Washington.

And at many small banks - including Roxbury Highland - business often picks up in the wake of big mergers.

"People don't like the idea of that small-town relationship being taken away," says Roxbury Highland president Lennart Plahn. (Customers call him Lenny. And he often pitches in by helping open new accounts or counting cash in the back.)

His bank is oozing with small-town charm. This spring, for instance, it asked a local artist to decorate the glass walls in the lobby. They're now covered with pastel-colored painted flowers.

Every year - usually on Father's Day - the bank sponsors a kite outing at a local park. It sponsors a little-league team. And its foundation gives away $10,000 annually to community causes.

In small banks or large, tellers aren't highly paid workers and they often don't stay long. Mr. Plahn attributes the longevity of his tellers to the full medical benefits the bank provides.

As for minority lending - which some critics say big banks fail to do enough of - Roxbury Highland "has always done it - it's part of our business," Plahn says. (With a 45-percent-Hispanic customer base, it can't afford not to.)

Experts say banks like Roxbury Highland can survive because they're carving out an entirely different niche than are big institutions. "Ten years ago, the product line at big banks and small banks was virtually identical," says Tony Plath, director of the Center for Banking Studies at the University of North Carolina, Charlotte. "But now the industry has fragmented. So can a community bank survive? Sure, but just not as a conglomerate."

One key to the success of small banks is the nature of the banking business. In other industries, high-powered firms that buy in bulk - such as Wal-Mart - can pressure suppliers to lower prices. Then they can undercut mom-and-pop shops.

But in banking, money doesn't get cheaper, no matter how much you buy (unless the institution has a particularly strong credit rating).

Still, the current merger mania is driven by the belief that greater efficiency can be achieved by cutting overhead and investing in super-fast computers that can sling money from coast to coast. But the gains are only incremental, so smaller banks can keep up by staying lean.

Community banks generally can't compete, however, with the slew of services that big banks offer - credit cards, a massive network of ATMs, access to financial advisers, and the ability to buy mutual funds or insurance.

That pushes them to hone their customer-friendly strategy.

Take Guaranty Bank in Charlottesville, Va. - a five-branch bank with $150 million in assets.

It has a home-town-hero strategy. Its recent series of TV spots had bank president Tom Baker sitting in his living room, clad in a sweater, telling viewers that his community is as important to him as his shareholders.

The ads weren't scripted. In fact, Mr. Baker just sat down in the chair and started talking. After several employees edited down his remarks, the ads were ready.

It was a simple approach. But it seemed to work. The bank has 1,500 new depositors since January.

Although the neighborly approach is a proven one, community banks still may have to adapt to survive.

At Roxbury Highland, changes come a little at a time. The bank may do away with fees for its one ATM machine to try to stay competitive.

It also just launched an Internet Web site, which was created by the high-school son of one of the bank's board members.

"We did pay him to do it," Plahn, the president, assures.

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